Effect of Interest Rate Deregulation on Loans and Advances of Deposit Money Banks in Nigeria

International Journal of Research and Innovation in Social Science (IJRISS) | Volume V, Issue IV, April 2021 | ISSN 2454–6186

Effect of Interest Rate Deregulation on Loans and Advances of Deposit Money Banks in Nigeria

Francis Ojo Adebayo¹, Ilemona Adofu PhD^2
1 Enterprise Development & Promotion Department, Federal Ministry of Youth & Sports Development, Abuja, Nigeria
²Department of Economics, Federal University of Lafia, Nasarawa State, Nigeria

Abstract: The study examined the impact of the lending and deposit rates in the face of deregulation on the loans and advances of deposit money banks in the country covering the period of 1986 to 2019 using annual time series data. Using the Autoregressive Distributed Lag (ARDL) model, findings from the study revealed that the deregulation of interest rate in Nigeria encouraged the disbursement of loans and advances within the economy, but it was however not significant. In addition, the study found that the policy led to an inverse relationship between deposit rate and loans and advances in the country. Higher deposit rates significantly discouraged deposit money banks from granting loans and advances. To ensure that interest rate deregulation has a much significant effect on the loans and advances of deposit money bank, the deregulation of the sector must be full, as against the partial deregulation being presently practiced, to encourage the desired level of competition which would spur the growth of the sector, and ultimately expand credit facilities for the Nigerian economy.

Keywords- Interest rate, Loans, Advances, Deposit Money Bank (DMB), and Deregulation

I.INTRODUCTION

The Federal Government of Nigeria developed and implemented the interest rate deregulation aimed at driving the banking sector to increased private sector participation to boost the economy confidently. Then, the banking sector has not shown any improvement connected to deregulation since the commencement of the policy in 1989 rather developments in the sector are mainly from other policies of the Central bank of Nigeria (CBN)(Francis, 2019). The success of the deposit money banks mainly depends on total savings deposits of customers. This could explain why banks sets high targets of saving deposits for their operations staff to sustain their business.
Interest rate in Nigeria is still indirectly regulated although, officially, the banks are under deregulation. The Monetary Policy Rate (MPR) which the Central Bank of Nigeria (CBN) uses to control interest rate still defines the direction of interest rate flow in deposit money banks. A higher MPR means interest rate will be high and vice versa

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